Make your cash last until pay day
We all know that feeling of dread when the last week before pay day looms into view and we are forced to start counting our pennies. According to a study by Abbey, most Brits run out of money on average five days before pay day, with 64% regularly making sacrifices in the days preceding their next pay packet.
While 34% dip into their overdrafts in the last week before pay day, statistics from price comparison website moneysupermarket.com reveal that 13% admit going into the red within just one week of being paid.
Eeking out the last few pennies until your next pay packet is a miserable experience: scouring the cupboards for makeshift meals and breaking out in a cold sweat every time you hand over your credit or debit card.
This is in stark contrast to the carefree attitude we often adopt in the days immediately after being paid: splurging on clothes, nights out and bigger purchases such as holidays or furniture.
We spend at least £80 in the first 24 hours of being paid, according to the Co–operative Bank, and this rises to £228, or nearly 15% of an average monthly salary, within 48 hours. Skip forward 11 days and the average person has spent £792 – that's half the average wage packet.
As well as being bad for our bank balances, veering from one extreme to the other can't be good for our stress levels. But there are ways to make it through to pay day unscathed – take a look at our guide to the things you should and shouldn't do.
... use credit cards to withdraw cash
Almost a third of people who make cash withdrawals on their credit cards are unaware of how much it costs, according to uSwitch.com, and 12% believe it's no different to a debit card withdrawal.
Unfortunately, some cardholders make the mistake of assuming that interest rates don't apply when they withdraw cash with their credit card. Perversely, they then often use this money to pay off other debts.
Make no mistake, credit card interest rates are high in the first place, but taking out cash with your credit card will cost you even more. In fact, interest rates on cash withdrawals are on the up too: from 23.65% to 26.7% a year.
Bear in mind too that with credit card cash withdrawals, interest is applied from the day the withdrawal is made, as well as an initial fee, which can be up to 3%, or £5.
... take out a payday loan
You may be tempted to take out a short-term loan to tide you over until your next pay packet; however, alongside the convenience of a loan over a short period of time come inconveniently high interest rates.
Pay-day loans lend approximately £80 to £1,000, and a typical APR is 1,286.1% – that equates to £25 on a £100 loan – and you will have to pay it back within 31 days.
"Payday loans are the ultimate barometer of how tough things are in much of Britain. We saw an explosion of pay-day loans from January 2008 onwards, with more and more people spending all of their income on essentials, but still not being able to stretch out their pay packet to the end of the month," says Tim Moss, head of loans at moneysupermarket.com.
This upward trend has begun to plateau in the last six months, although levels are still three times higher than in 2011.
... exceed your overdraft limit
No one likes going into the red, but for many of us it's a fact of life. Provided you're sensible, know your overdraft limits and are capable of paying it off in due course, using your authorised overdraft can be a helpful buffer at the end of the month.
Frances Walker, a spokesperson for the Consumer Credit Counselling Service, believes authorised overdrafts can be "good in the short term".
However, if you go over your authorised limit you can find yourself in trouble. When running low on cash, 14% of us admit to breaching our overdraft limit, according to moneysupermarket.com, even though the penalties are high.
"Your overdraft can be a murky place to reside – especially if you're close to the edge of your authorised limit. Unauthorised rates are higher and have sharp penalty fees of up to £35," warns Kevin Mountford, head of banking at moneysupermarket.com.
... skip bills or debt repayments
Stalling your repayments may temporarily ease the financial strain but in the long run you'll have just as much to pay off – if not more, thanks to interest rates on the outstanding amount.
Of course, you may have no option, but if you have to delay your repayments your first priority should be to contact your lender and ask for a payment holiday.
Simply ignoring the bills won't make them go away, and could severely affect your credit rating. Given that interest rates are currently at a low level, if at all possible, it's worth keeping up repayments.
... take out a store card
Handing over a store card somehow doesn't feel quite as bad as using your credit or debit card. Sadly, unless you're able to clear your card within the required amount of days, the interest you have to pay isn't worth it. "Store cards have higher interest rates than credit cards – it's always best to pay them back sooner rather than later," warns Walker.
The average store card APR is 25.15%, and even the more competitive cards on the market, such as the 17.9% that retailer Evans charges, are still higher than the best-buy purchase credit card.
"It might be stating the obvious, but if you're looking at ways of releasing capital, then make sure that you don't buy things on credit," says Bob Perkins, technical director at Origen Financial Services.
... use cash to buy goods
It's easy to spend £100 on your debit card and not even notice it; paying with actual money, however, makes it all too real – probably because your wallet is suddenly a whole lot lighter.
Take out a sum of money at the start of the week and see how long it takes you to spend it – if it lasted less time than you hoped or expected, it should be pretty straightforward to work out what things you need to cut back on.
Leaving your debit card at home when you hit the shops might sound an extreme measure, but if you're prone to impulse buys, it's one way of disciplining yourself.
... cut back on luxuries
Many of us fritter away money on non-essentials while simultaneously bemoaning how broke we are. Although 43% of respondents to Abbey's survey said they sacrificed their social lives when funds were low, 3% said they would rather not give up on the clothes, cosmetics and nights out, and prefer to go hungry in the last few days instead.
While only a minority of people take such an extreme view, we're all guilty of wanting it all: you work hard, so why can't you reward yourself with nice things – even if you don't have the money to pay for them? To put it baldly: if you can't afford to pay your electricity bill, you can't afford to go out for a drink.
"See where you can cut back on what you spend. For example, making sandwiches to take to work rather than relying on shop-bought sarnies, or foregoing a Starbucks coffee every day, can make a difference. It may seem small, but remember, small changes can add up," says Walker.
Of course, if some strategic cutbacks leave you with more available funds come the end of the month, you can choose what to do with your extra money. Clearing your debts should be a priority, followed by building up a suitable amount of savings, but if you've still got money left, that's when you can enjoy a guilt-free treat or two.
... write down what you earn and spend
An easy way to work out how much is going on luxuries and what's going on essentials is to write it all down. This will let you see if a few tweaks to your spending habits are all you need to keep you going to pay day or if some more decisive action is required.
"Make up a spreadsheet detailing your monthly pay and fixed outgoings, then see what you've got left for non-essentials and prioritise these," says Perkins.
Your main fixed outgoing is your rent or mortgage, followed by other costs such as bills, insurance and living expenses. Divide up one-off costs like annual car insurance over 12 months too, so you know exactly how much money you spend.
Then add up all your debts and loans (excluding your mortgage), and if this equals more than 20% of your take-home pay, then, according to Walker, you're overextending yourself.
"It's a matter of organisation, biting the bullet and seeing what you can and can't afford – for example, cancelling the Sky HD+ because you can't afford the extra £9 a month," says Perkins, who describes these choices as "lifestyle decisions".
... talk to your bank
If your findings show that your income doesn't even cover the fixed essential costs, then aside from making cutbacks, you should contact your bank or relevant provider. Whether you require an overdraft extension or are struggling to pay a bill, it's always better to let it know. Don't hope that the bank or credit card provider won't notice, because it will.
"If your budget shows you've not got enough to cover the fixed costs, you need to contact the relevant people as soon as possible instead of looking to loan arrangements," says Perkins.
Given the current difficult climate, banks are likely to be more understanding, and would prefer to receive something from you other than a bounced cheque.
"Most lenders (especially with mortgage debt) are prepared to be fairly flexible at the moment. The pressure is on lenders to behave well," says Walker.
... find ways to lower your bills
You can't go without heating and water, but you can reduce your bills. For the cheapest bills, use an online tariff, get electricity and gas from the same provider, and pay by direct debit.
A lot of people are dubious about direct debits because it means the provider has a regular, guaranteed income from the customer, and this amount might be worth more than the amount of gas, water or electricity used.
However, in the event of paying too much one quarter, your money will simply be carried over to cover the next. "At least you know at the end of each month what's going out of your account," Perkins adds.
He also points out that when money is tight a lot of people decide to cancel financial products they deem surplus. However, at a time when unemployment levels and redundancy are high, cancelling a policy such as income protection defeats its very purpose.
Perkins says: "You need to look ahead and consider if this is a false economy. For example, when you come to reinstate a life insurance policy you will be older, maybe less healthy and will have to pay more."
What to do when you are really in trouble:
- Telling loved ones and people you trust can ease the burden. Admitting you're in financial trouble can be embarrassing, but the longer you ignore the problems, the worse they'll get.
- Break the cycle: don't borrow more money or take out further loans to pay off existing debts.
- Seek professional advice from organisations such as the Consumer Credit Counselling Service, your local Citizens Advice Bureau and thedebtadvisor.co.uk. They can help you with advice on any extra benefits and allowances you may be entitled to, offer practical support, and if necessary help you draw up a debt repayment plan
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
Short-term cash loans designed to be borrowed mid-way through the month to tide the borrower over until they next get paid, whereupon the loan is settled. Generally used by people with bad credit ratings and/or no access to short-term credit such as an overdraft or credit card. Like logbook loans, this type of borrowing is hugely expensive: the average APR on payday loans is well over 1,000% and in some instances can be considerably more.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
Issued by a bank as part of a current account and, in a nutshell, serves as electronic cash. Unlike a credit or charge card, where you get an interest-free period before you have to settle the bill, the funds spent on a debit card are withdrawn immediately from your current account. Unless you’ve arranged an overdraft, if you don’t have the cash in the account, you can’t spend it.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.